Faculty of Economics and Business Administration Publications Database

Optimal Social Security Claiming Behavior under Lump Sum Incentives: Theory and Evidence

Selected
Authors:
Mitchell, Olivia S.
Rogalla, Ralph
Source:
Volume: 88
Number: 1
Pages: 5 - 27
Month: 03
ISSN-Print: 0022-4367
Link External Source: Online Version
Year: 2021
Keywords: Retirement; Annuity; Delayed claiming; Pension; Early retirement; Social Security
Abstract:

Many Americans claim Social Security benefits early, though this leaves them with lower benefits throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people received a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents’ answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.

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